 | | The Daily Reckoning | Friday, December 3, 2010 |
- Crisis continues on the continent: making sense of the euro babel,
- Investing in India, come boom or come bust,
- Plus, Bill Bonner on the tangled web of today's financial system and plenty more...
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|  | | | | The Shaky Foundation of the Financial System | | And how the architects of the economy are preventing real growth | | |  | | Bill Bonner | Reckoning on this day from Mumbai, India...
Oh, what a tangled web we weave
When first we practice to deceive
- Sir Walter Scott
"The trouble with today's financial system," we told a Bloomberg reporter, "is that it is based on fraud.
"At the bottom of it is paper money - itself a kind of deception. It pretends to be real money. And it is real money - in the sense that you can use it to buy things. But it is prone to lie. All the feds have to do is to turn on the printing press and it will tell you that you are a lot richer than you really are.
"This sort of flimflam has been going on ever since the end of WWII. The feds systematically increased the amount of paper money...leading people to think they had more purchasing power than they really had. Today, a dollar is worth only about 3% as much as it was 100 years ago.
"But that's just the beginning of the scam. They also systematically under-priced credit - in the belief that the key to prosperity is consumer credit and spending, rather than saving and production.
"The system has its architects and its operators - all quacks and mountebanks. They pretend that they can manage the currency and manage the economy. Yet they misunderstand the most basic elements of how a real economy works. Wealth does not come from consuming...it comes from producing.
"The managers claim to be able to manipulate the economy so well that they can actually improve its performance...that is, they say they can make the economy perform better than it would on its own...better than it has naturally for the past two thousand years. By eliminating the cyclical downturns, the feds told us that they would we all be richer...and free from the volatility that plagued us theretofore.
"So they fiddle and fake it...improvising...and making it up as they go along. The raise interest rates...and then they reduce them. They introduce more paper money when it suits them and change banking rules as their theories suggest.
"When anything 'bad' happens, defined as something they don't like, they rush to fix it. But what can they fix it with? A little duct tape of monetary policy. A little fiscal baler twine too.
"Their fixes are not completely random or haphazard. They have a bias - towards more credit, more spending, more cash, and more speculation. If they tighten rates one month, they loosen them for two months. If they run a surplus in the federal accounts one year, they run deficits for the next five.
"Gradually, more and more debt, mistakes, bad judgments and cockamamie speculations build up. And then, the authorities are under pressure...running from one crisis to another...providing credit to one zombie...and bailout to another...and raw meat to a third.
"And then suddenly, the discipline and self-restraints that held them back gives way like a frayed old rope. Then the central banks and Treasury authorities are running free...abandoning themselves to the trickery and fraud inherent in their profession. The European Central Bank says it will provide 'unlimited liquidity' to those who need it, in order to fend off a debt crisis in the Old World. In the New World, the Bank of Ben Bernanke is already bailing out big banks in North America as well as those of Europe. And everywhere, the feds are ready to support one another...and bankroll the IMF...with more paper money and more credit...
"...all of them desperate to hold the system together."
And now they link arms - the Fed, the ECB, the EU and the US...and don't forget Japan and the BOJ. And off they march - right off a cliff.
More reckonings, after today's column...
| | | | | |
| | The Daily Reckoning Presents | Thinking the Unthinkable
by Bill Bonner | | | This week, like the last one, was dominated by euro babel. Speaking in their various tongues, all at once, Europeans were talking nonsense. Especially Jose-Ignacio Torreblanca. The senior fellow at the European Council of Foreign Relations begins: "in an ideal world," he says it is "fair and rational" for people to get what they've got coming... referring to the people who lent money to Irish banks. He even quotes the old Latin maxim: fiat iustitia, pereat mundus (follow the rules, even if the world should perish).
He should have stopped there. Instead, he misses the point he has just made. This time it's different, he says. Why? Because "there is a good chance that in real life the eurozone could be killed..."
When the financial crisis hit in '08, Europe might have let the chips fall where they may. But for nearly a century, elected officials have thought they could keep the chips from falling at all. Instead of merely consuming and redistributing the fruits of the economy; they pretended, by enlightened management, to increase them. Few people noticed the audacity of it. But in a downturn, government no longer lets wealth perish. It counteracts corrections with "stimulus." And it doesn't merely provide a stable currency, it manages a "flexible" currency system to help guarantee full employment and prevent debt crises.
By the 21st century, diddling the economy has become second nature...but much less effective. In the US, the fiscal and monetary stimulus of the early '30s - equal to about 8% of GDP - had a powerful effect. One year later the US economy was growing at an 11% rate. Nearly four score years later, a combined stimulus effort of about 30% of GDP produced a response of barely 2% GDP growth. As for last week's 85 billion euro Irish bailout, the market rally was over by tea time the following day.
The trouble with trying to get the outcome you want is that you end up getting the outcome you deserve anyway. Ireland guaranteed bank assets nearly 6 times greater than the nation's GDP. Now, with unemployment at 20% and GDP down nearly 15% over the last two years, investors wonder how Ireland can possibly be good for the money. And they are beginning to wonder about Spain, Portugal, Italy and even France. Between them, French and German banks hold nearly a trillion euros worth of peripheral European nations' debt. How long will it be before they go down too? The Irish bailout may cost about 100 million euros. Spain is ten times as big. These were "unthinkable" thoughts, said former Italian Prime Minister, Romano Prodi.
The periphery states benefited from the low interest rates of the Eurozone. With lending rates at 3%, instead of the 10% rate it had before it took up the euro, Irish property boomed. Irish banks were able to lend their way to insolvency. When the bust came, potential losses became real losses. But insolvent institutions do not become more solvent by borrowing more money. By the time the fix for Ireland is fully implemented, the Irish government will be deeper in debt - with a quarter of its GDP needed for debt service. At that level, they will be sunk. And you can forget about "growing" out of this debt problem. This year, for the first time ever, more Europeans will retire than join the workforce. Retirees are not producers of tax revenues. They are consumers of it. Besides, how will the Irish economy grow at all, with the government cutting back by 10% of GDP over the next 4 years, probably followed by another 10% cut when this one proves insufficient?
But that's what happens. One manipulation leads to another improvisation. You pretend it's a matter of principle, but you've already thrown out the "iustitia." You're just trying to get what you want, making it up as you go along.
The euro is a managed paper currency, like the dollar. Still, it is not managed enough for many Europeans. The Irish might revolt, leave the euro, and bring back the punt. In the old days of drachma and pesetas, Europe's sunny countries could scam their lenders with shady currencies. There is even a proposal to introduce a new currency, known either as the "medi" or the "sudo" - designed to help Europe's periphery states to manage their way out of their financial obligations. A weaker currency would lower the real value of debts, employment contracts, pensions and just about everything else.
"There will be no haircut on senior debt," said Olli Rehn, the EU's commissioner for economic and monetary affairs, still trying to keep the chips in the air. And why not? Because the consequences are unthinkable? No, he's thought about them. He just doesn't like them. But who cares? You can't really manage an economy. You have to let it happen. Here we offer some constructive criticism: Stop worrying. What will happen if lenders suffer the losses they deserve? We don't know. But we'd like to find out.
Regards,
Bill Bonner,
for The Daily Reckoning
Joel's Note: Of course, a widespread financial collapse might not be such a bad thing. Aside from providing a spectacular fireworks show for prudent, gold-holding investors, there will be pockets of real and honest opportunity...if you know where to look.
As a Fellow Reckoner or, as Bill likes to say, a "long suffering reader" of these pages, you are cordially to invited to partner with Bill and his team of global investors to seek out these opportunities. If you haven't yet read over the invitation to join the Bonner Partners Family Office program, here's a link with all the relevant info, including a bit of background on the Bonner family and a general outline of the project's goals.
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| | | | | | Bill Bonner | The Pros and Cons of Investing in India
by Bill Bonner | | | What about investing in India?
"The Sensex seems much too high to us," we replied. "Then again, there are a lot of companies that are little researched that are cheap...and growing fast.
"What I like about the Indian economy is that it seems to grow no matter what happens. Boom, bust, assassination, tsunami, riot - it doesn't care.
"And it grows in spite of what the government does. There is some rule of nature, as yet unidentified: all governments do stupid things. But the more mature the government, the more stupid things it does.
"It is probably because mature governments have more money - at least in the rich countries. So, they subsidize everybody. The old. The young. The halt. The lame. The farmers. France even subsidizes the press.
"As the tide of subsidies washes in, the incentive to work hard ebbs away. People become used to getting by without doing very much. They get used to conniving with the feds, rather than engaging in difficult and uncertain businesses.
"You don't have that problem in India. There is plenty of corruption, but it is limited to the powerful groups that control the legislature and the government. The middle and lower classes do not expect much in the way of handouts; there hasn't been enough money available.
"So, the economy is still fairly light on its feet. Wages are low. People are getting rich fast. Government tries to stifle progress and make sure wealth gets funneled to cronies and apparatchiks, but the economy is largely out of control. The politicians pass new legislation every day. And the economy grows at night.
"And right now there are too many people earning too much money. They can't be stopped. They won't allow government to hold them back. Instead, the regional governments will begin to compete with each other to offer infrastructure and lifestyle improvements. Politicians will get out of the way, for fear they will be booted out of office if they prevent people from getting the wealth they feel is within their grasp.
"India looks good. Maybe not next year. Maybe not the year after. And maybe not the leading companies. But I would like to make an investment in India, go away for twenty years, and see what it was worth when I came back.
"Of course, twenty years from now...I'll be happy to be able to come back at all."
*** How 'bout that Obama! He's put on the imperial purple:
"He stayed at your hotel, the Oberoi," said a colleague.
"His team took up the whole hotel. It was unbelievable. They took up the hotel next door, too. There were helicopters overhead all the time. And US warships had been sent to block the harbor to make sure terrorists didn't run up onto the beach in small boats, like they did the last time.
"We've never seen anything like it in India.
"One of the local papers computed the cost of the visit at something like $100 million. The report got picked up by the US press. Then the White House denied it and then said it wouldn't give the real figure for national security reasons. Ha ha...
"A hundred million was probably about right..."
Regards,
Bill Bonner,
for The Daily Reckoning
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Here at The Daily Reckoning, we value your questions and comments. If you would like to send us a few thoughts of your own, please address them to your managing editor at joel@dailyreckoning.com
| | |  |  |  | Inter-Galactic Bailout – The Fed extends the hand of debt beyond borders
Americans may see the dollar rising against the euro and feel a little patriotic pride. But this is not a good thing for Americans. If Europe comes unhinged, the crisis will waste no time in hitting American banks and the US economy. Ben Bernanke has been trying to get the dollar to go down. A rising greenback makes Germany's products less expensive and US exports less competitive. It contributes to the threat of deflation...
A Gold Buyer's View of the Lopsided Risk-Reward Ratio
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If you want some bad news, then Doug Noland, in his Credit Bubble Bulletin at PrudentBear.com, has some for you. He reports that that "Global yields are on the rise." I was going to make a complimentary comment about how cleverly Mr. Noland conveyed such bad news in only five words; "Global yields are on the rise." Then I noticed that I could be more concise than Mr. Noland, a rare triumph for me, with "Bond prices falling," which is only three words.
Surviving Inflation
The Dual-Mandated Failures of the Federal Reserve | A Century of Money Mischief
On precisely the same weekend in November as the Republican victory parties in and around Washington, the Fed celebrated its centennial far away from its DC home at Jekyll Island, Georgia. One hundred years ago, seven US Congressmen and bankers gathered together in secret at this highly remote location to lay the political foundations for what would become, in 1913, the Federal Reserve Act.
India: Land of Hope and Growth
Putin Suggests Russia Could Join Euro Zone, Make Euro World's Reserve Currency | |
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